Review of Corporate Finance > Vol 2 > Issue 1

Rookie Directors and Corporate Fraud

Min Bai, School of Economics and Management, University of Science and Technology Beijing, China, , Chia-Feng (Jeffrey) Yu, Adelaide Business School, University of Adelaide, Australia,
Suggested Citation
Min Bai and Chia-Feng (Jeffrey) Yu (2022), "Rookie Directors and Corporate Fraud", Review of Corporate Finance: Vol. 2: No. 1, pp 99-150.

Publication Date: 02 Mar 2022
© 2022 M. Bai and C.-F. Yu
Corporate finance,  Corporate governance,  Event studies/market efficiency studies,  Financial reporting
JEL Codes: G32, G41, M41
Rookie directorsfraud monitoringreputationboardroom experience


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In this article:
Background, Related Literature, and Hypothesis Development 
Data, Sample, and Variables 
Empirical Model 
Empirical Results 
Robustness Checks 
Subsample Analysis 
Additional Analysis 
Discussion and Conclusion 


This study examines how rookie independent directors (RIDs) affect corporate fraud. Using a large sample of Chinese listed firms, we find that firms with greater RID representation are more likely to commit fraud. Our result remains robust after controlling for numerous firm and board characteristics, director fixed effects, using alternative measurement, and employing an instrumental variable approach and an entropy balancing matching method. Moreover, the effect of RID representation on fraud is more pronounced for firms with non-Big Four auditors, less qualified foreign institutional investors and institutional ownership, more diversified businesses, related party transactions and intangible assets, and a higher than a critical mass of RIDs. Additional analysis finds that higher board meeting attendance of RIDs is not associated with lower fraud likelihood, strings of consecutive earnings increases mediate the positive relationship between RID representation and fraud, and firms with a rookie board have heightened fraud severity. Overall, our findings highlight that the monitoring efficiency of RIDs in countering fraud could be compromised by their lack of boardroom experience.